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More Than a Whiff of Fraud

March 26, 1989

Atty. Gen. Dick Thornburgh has estimated that up to 30% of the failures in the savings and loans industry are due to fraud and insider abuses, but the General Accounting Office thinks that figure is much too low. The GAO's own study determined that fraud and criminal negligence figured in the insolvency of at least 70% of the thrifts it looked at.

The S&L mess, which is expected to cost taxpayers at least $100 billion to clean up--some projections go as high as $150 billion--thus "did not come about primarily because of economic conditions or deregulation." Its root cause can instead be traced to the irresponsibility, greed and corruption of a minority of managers in the industry.

The GAO studied 26 thrift institutions that accounted for 60% of the total losses sustained between 1985 and 1987 by the federal fund that insures S&L deposits. In all 26 it found that record keeping and controls were lax. In 23 it found that excessive loans had been made to one borrower. At 20 it found conflicts of interest among officers and directors. In 17 it noted excessive salaries and benefits paid to officials.

And what was done? Industry regulators referred cases involving 182 thrift institution officers to the Justice Department for suspected violations of statutes involving criminal conspiracy, theft, fraud and embezzlement. As of this month, 23 of those persons had been convicted, with 15 sentenced to prison. But, Asst. GAO Comptroller Frederick Wolf told a House Judiciary subcommittee, those sentences "generally were suspended with probation."

Suspended sentences in cases involving hundreds of millions of dollars in losses aren't much of a punishment or a deterrent. More clearly than ever now, the S&L mess can be seen as an S&L scandal, not so much a systemic failure as the rampant theft and squandering of other people's money.

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